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What is a Home Loan? All You Need to Know About Home Loans in India

Updated: Mar 22, 2022
What is a home loan All you need to know about home loans in india

A home loan is a type of mortgage loan that allows individuals to purchase their dream home by borrowing funds from a financial institution. The borrowed funds are then repaid in small EMIs over a period along with applicable interest costs.

Let’s understand home loan in detail and how it works.

What is Home Loan?

A home loan or housing loan is a secured loan that is obtained by offering the house property to be bought as collateral to the lender. Lenders like Grihashakti offer up to 90% of the value of house property as a home loan and the remaining amount needs to be paid by the borrower upfront as a down payment.

Features of Home Loan

Higher loan amount:

Depending on your home loan eligibility and repayment capability, the lender offers up to 20 times of annual income (annual take-home salary) as a home loan. Using a home loan eligibility calculator, you can calculate the maximum home loan you can avail of based on your finances.

Low-interest cost:

Home loan rate of interest is much lower compared to other types of loans, making it an affordable financing option for home buying and construction purposes.

Long repayment tenure:

A home loan has a long repayment tenure ranging between 25-30 years, depending on lenders. This makes it easier to repay the home loan without affecting your financial stability.

Tax benefits :

In the Income Tax Act 1961, there are multiple provisions under which you can claim a tax deduction on principal and interest repayment of up to Rs 3.5 lakh annually.

Multiple use-cases :

A home loan can be used for the purchase of a new house, construction, and extension of an existing house, providing much flexibility to borrowers.

No prepayment penalty:

If you have selected a floating interest rate on your home loan, there is no prepayment penalty involved. This helps you to close your home loan account much before the tenure, saving significantly on interest costs.

How Can You Use a Home Loan?

The following are the types of home loans offered by financial institutions:

Home purchase loan: The home purchase loan can be availed for the purchase of a new home from a real-estate developer or resale of existing house property.

Home improvement loan: The home improvement loan can be availed for home renovation. This could range from making some necessary changes to the structure as per the trends and requirements, changing tiles, painting walls, etc.

Home construction loan: This loan category can be availed of when you want to build your dream house from scratch on a vacant plot of land. The loan amount is disbursed as per the completion of milestones linked to the construction of the house property.

Home extension loan: If you have an existing house property and want to extend it by means of adding floors or rooms, a home extension loan perfectly fits your requirement.

How Home Loan Works?

Availing of a home loan is a big decision as you have to commit a part of your income for the long term for repayments. Before availing of a home loan, you need to understand, how a home loan works?

A home loan is availed of by offering house property that is bought or constructed as collateral with the lender. The lender keeps the right over your property until full repayments are done.

In case of default, the lender takes over the property to recover dues to avoid loss.

At the end of home loan tenure, after successfully repaying the home loan, the lender forgoes the right over property, and all original documents are returned.

How to Get a Home Loan?

The first step to getting a home loan is to compare and research the lender based on your requirement. Once you have zeroed on the lender, you can avail of a home loan by fulfilling all the eligibility criteria and providing the necessary documents requested by the lender.

Eligibility Criteria

  • Must be an Indian resident
  • Must be of minimum 21 years and maximum 65 years at the time of loan maturity
  • Minimum CIBIL score of 700
  • Must fulfill the minimum income eligibility and have a stable income source

To check the maximum home loan amount you could get, you can use the home loan eligibility calculator and get an estimate.

Documents Required

  • PAN and KYC documents
  • Income proof (Form 16, last 2 years ITR, salary slips for salaried and valid income proof for self employed)
  • Bank statements of the past 6 months
  • Documents relating to the property you wish to purchase

You must have understood the meaning of the home loan and how it helps you in buying your dream home without straining your finances. While applying for a home loan, ensure the resulting EMI doesn’t cause more than 50% of your monthly household income in order to ensure that your finances don’t feel strained. One should strictly adhere to the repayment timelines, and always pay the EMIs in full. In case of default, it negatively impacts your credit score and you may have to pay penalties.

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